Kerry offers plan designed to curb outsourced jobs

Economists are mixed on candidate's proposal to shift corporate taxes

March 27, 2004|By Julie Hirschfeld Davis | Julie Hirschfeld Davis,SUN NATIONAL STAFF

WASHINGTON - John Kerry proposed yesterday to cut corporate tax rates as part of a plan to discourage U.S. companies from sending jobs overseas, in a speech designed to fend off charges from President Bush that he is a stereotypical tax-and-spend liberal.

Speaking in Michigan, which has suffered crushing manufacturing job losses, Kerry said he would end a tax break that lets U.S. businesses avoid paying taxes on income they earn abroad. He promised that his economic program, including yesterday's proposal, would create 10 million jobs.

The plan is intended to target an issue that has become a flash point in the presidential race: the outsourcing of U.S. jobs to other countries. It follows Kerry's declaration that he wants to scrub the tax code of benefits for "Benedict Arnold" corporations that send jobs to lower-wage countries.

With polls showing many voters concerned about the economy, Democrats are eager to blame Bush for the loss of 2.2 million jobs during his term and to persuade Americans that Kerry has better ideas for spurring growth.

In return for canceling the tax benefit, which lets companies defer taxes on foreign income until they re-invest it on U.S. shores, Kerry proposed cutting the corporate tax rate. That rate, now 35 percent, would fall to 33.25 percent, a roughly 5 percent reduction.

"If a company is torn between creating jobs here or overseas, we now have a tax code that says, go overseas," Kerry said at Wayne State University in Detroit. "That makes no sense, and if I am president, it will end."

The plan did nothing to quell charges by Bush that Kerry is a tax-raiser at heart and that he's plotting a mammoth tax increase that would hurt the economy and stifle job creation.

Kerry's plan, is a "shell game" that "will do nothing to stop outsourcing" of U.S. jobs, said Scott Stanzel, a Bush campaign spokesman.

His plan would simply shift the burden, Bush aides said, from multinational companies to small businesses whose taxes would rise under Kerry's separate plan to cancel the Bush tax cuts for individuals earning more than $200,000.

Kerry's proposal takes aim at a tax benefit used by thousands of U.S. companies to avoid paying taxes. But, in a move calibrated to counter Bush's claim that Kerry wants to saddle Americans with a huge tax increase, the plan would cushion the blow to businesses through the corporate tax-rate cut.

His plan would also ease the burden by giving affected companies a one-time chance, for a year, to bring foreign-earned income back to the United States at a tax rate of 10 percent - less than one-third of what they would otherwise owe.

"Some may be surprised to hear a Democrat calling for lower corporate tax rates," Kerry said. "The fact is, I don't care about the old debates. I care about getting the job done and about creating jobs in America."

The elimination of the "deferral" option in the tax code would raise about $12 billion, the Kerry campaign said, enough to pay for lowering the corporate rate. Foreign income from the sale of goods or services within that country would be exempt from the change. Only income from the sale of goods to the United States or other nations would be affected.

The Bush campaign dismissed the plan as another in a string of flip-flops by Kerry, who they said has opposed past efforts to cut corporate taxes and to give companies a "tax holiday" on bringing foreign income back to the United States.

"He's voted for higher taxes 350 times, and he's now proposing a political reshuffling of the tax code that doesn't confront the critical issues that drive business decisions in this country," said Stanzel, the Bush spokesman.

Kerry's plan is reminiscent of a plan Bill Clinton laid out in the early 1990s. The Clinton plan coupled tax increases with targeted cuts designed to spur job creation and economic growth. That's no coincidence; it was drafted in large part by Gene Sperling, one of Clinton's top economic advisers, who is now advising the Kerry campaign.

Economists and tax experts differ on the likely effects of Kerry's proposal. Even Kerry's advisers say it would not, by itself, stop the outsourcing of U.S. jobs. It would, however, rid the tax code of a perverse incentive to invest abroad, they say.

"It does point in the right direction, and it lays the foundation for solid job growth by creating some incentive for employment here, rather than abroad," said Peter R. Orszag, an economist at the Brookings Institution whom the Kerry campaign consulted about the plan and who supports it.

But the proposal would probably not create many U.S. jobs, Orszag said. "In terms of short-term employment growth, there's very little effect," he said.

Other economists sided with Republicans in arguing that Kerry's proposals would have a disastrous effect on U.S. companies, raising their tax burden by canceling a key benefit and compensating for it only modestly with a corporate rate cut.

"All it's going to do is force U.S. companies to move their headquarters and re-base their companies in other countries where they don't have this kind of tax system," said Bruce Bartlett, an economist at the National Center for Policy Analysis.

Manufacturing companies worry that the end of the overseas tax break could hurt more than it would help, said Michael Baroody, executive director of the National Association of Manufacturers.

"It seems that what Sen. Kerry's proposal gives with the one hand of corporate rate reduction, it may very well take away with the other hand of the deferral on foreign income," Baroody said. "This may not be as helpful as he is intending."

Broody also sided with those who doubt that Kerry's plan would encourage companies to build factories or invest more in the United States. They say the tax breaks now in place are only one reason - and not the primary one - why companies choose to outsource jobs or to build factories in foreign countries.

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